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Finance Module 9 Homework Problems Fall 2013




Question;Instructions: Please answer each of the seven (7) practice problems below. Also, please alsoshow as much of your solution steps as is feasible in the space provided beneath each problem.Please be sure to round your answers to two (2) decimal places, also, please note that forproblems dealing with a percentage answer such as rates of return on stocks, your calculatorshould be set to four (4) decimal places so that after converting your answer to percentage termsyour final solution will be rounded to two places. As you know, this homework assignment isdue by Sunday, November 24, 2013 (by midnight).1. A company is faced with two independent investment opportunities. The corporation has aninvestment policy which requires acceptable projects to recover all costs within 3 years. Thecorporation uses the discounted payback method to assess potential projects and utilizes adiscount rate of 10 percent. The cash flows for the two projects are:Year01234Project ACash Flow-$100,00040,00040,00040,00030,000Project BCash Flow-$80,00050,00020,00030,0000Which is the discounted payback for each project?2. The Seattle Corporation has been presented with an investment opportunity which will yieldend-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and thefirm's cost of capital is 10 percent. What is the NPV for this investment? Now assume theFederal Reserve takes actions which increases interest rates and therefore impacts the firmsWACC. If the new WACC for Seattle Corporation becomes 14 percent By how much did thechange in the WACC affect the project's forecasted NPV? That is, find the NPV resulting fromthe Federal Reserve actions.3. Shannon Industries is considering a project which has the following cash flows:Year01234Cash Flow?$2,0003,0003,0001,500The project has a payback of 2.5 years. The firms cost of capital is 12 percent. What is theprojects net present value NPV?4. Alyeska Salmon Inc., a large salmon canning firm operating out of Valdez, Alaska, has a newautomated production line project it is considering. The project has a cost of $275,000 and isexpected to provide after-tax annual cash flows of $73,306 for eight years. The firm'smanagement is uncomfortable with the IRR reinvestment assumption and prefers the modifiedIRR approach. You have calculated a cost of capital for the firm of 12 percent. What is theproject's MIRR?5. What is the internal rate of return for a project that has a net investment of $75,000 and thefollowing net cash flows: Year 1 = $15,000, Year 2 = $20,000, Year 3 = $25,000, Year 4 =$30,000?6. Scott Corporation's new project calls for an investment of $10,000. It has an estimated life of10 years. The IRR has been calculated to be 15 percent. If cash flows are evenly distributed andthe tax rate is 40 percent, what is the annual before-tax cash flow each year? (Assumedepreciation is a negligible amount.)7. A CFO is considering a project that has the following cash flow and WACC data. What is theproject's MIRR? Note that a project's projected MIRR can be less than the WACC (and evennegative), in which case it will be rejected. The firms WACC is 15%.Project AYearCash Flow0-$800135023503350


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